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Hopefully its mispricing - In recent yrs I have seem a number of similar bonds where the owner is out of favour due to macro trends exacerbating their micro issues. All, so far, paid up. The number of UK companies that defaulted on their bonds are relatively few - however, those that did often came out of the blue and had hidden, sometimes fraudulent issues. I dont see the probability of this scenario being high in this case. I hope not...
Interesting info about Oakland.At June 23 it was RGL’s 12th largest investment valued at £12.9m.
Continued.....
enough to prevent breach of LTV requirements.
Canetoad; whilst I know your considerations come from a bond point of view, they do a service to stick holders too, so thank you. For what it's worth, I think the bond is safe as houses and the drop an amazing opportunity.
Ethiopia; agree totally with your post which is my stand point.
Some general thoughts....
For the lazy, the Edison report 27/09/23 gives a quick glance at the debt breakdown.
The bond. If not paid, wll constitute an end for RGL, on confidence/perception grounds not on fiscal fundamentals. For that reason alone, it will be repaid. How is conjecture, but the obvious source would be a replacement albeit at a 10% cost; and despite LTV level breaches/concerns, there is enough property value to get such away.
And crucially, enough income (rent roll). Notwithstanding that many seem to have ignored the cyclical nature of RGL's arena, and that cycle being very much at the bottom, if one ignores property value depreciation but accepts (due to work from home), demand/occupancy reducing by 10%, it is hard to see the rent roll reducing below £50m pa. Which supports the £43 mill cost of refinancing and pushing back say 5 years, all the debt at 10%. Yes, there does need to be a plan, to clear debt, and the absence of such is my only concern here. Their ability to kick the can down the line isn't. I don' see Santander closing in on the loan at any LTV breach (I have that loan at currently 56% LTV and the reason for the SP/bond drift), precisely because they can renegotiate an extension/revision on better terms for them, supported by that cash flow. The reality being that RGL only need to pay £5m as a one off to reduce the LTV to compliance.
If not refinanced, the bond could be paid from a combination of cash at hand and cancellation of dividends, and whilst the later being a reit is linked to income, paying the debt would negative such so compliance would be maintained, for a dividend to be restored when that free income is.
Yes, I do think they are in a declining market, but there is still income/profit within such a niche. I don' think a firesale is warranted, I do think they need to manage occupancy/sales better. The Oakland property , which I know, is a good example. They have long had 3 floors for rent there , and whilst an excellently managed/provisioned property, it is just TOO far, too on the periphery of the market/city centre to be attractive office space. That 20% of the facility is empty will be hampering costs and margins. It will never be in the right place as an office space again. But similar offices in the area have/are being repurposed for accomodation, and it would be perfect for that trend. It would be a great property/location for those specialising in the homeless/refugee obligation provision area and as student accomodation. Targeted sales such as Oakland, yes, for prudence, but not for firesale purposes.
The rent roll, selective sale of just 1 underperforming property is enough to prevent
Whether or not the Bond covenants have been breached at close you could only get 87p for RGL 4.5% 2024 maturing in August at 102.25 with coupon. Simple maths..that's a 17.5% risk reward in just 6 months or 38% annualised.
Now either that is the Mother of all Market mispricings or there is something cataclysmically wrong with RGL. And what price for rolling over that debt
@CaneToad, I've had a look at what you suggested and you clearly know your stuff, thanks.
As far as I can tell all other covenants are LTV not more than 60% except Santander which moves from 60% to 50% July this year. The latest Santander LTV from June 2023 is given as 47.5% so maybe a problem come July but the loan value is £62.5m and as of 9th November 2023 RGL had £32.6m cash so I'm guessing they could just pay some of the loan off to reduce the LTV.
I general the rent roll of £67.8m far exceeds the interest payments of £15.7m including the bond. So as far as I can tell the main issue is refinancing the £50m and of course the future of office space in general.
@Etotheipi: the covenants are different for each portfolio of properties. They are known; you need to look back at their various documents; e.g. the banking covenants were published in the prospectus, issued on July 2019.
For example, the covenenant with Santander UK is that the LTV must remain below 50%. Those properties are owned by a subsidiary called Toscafund Glasgow Limited. In order to know if that has been breached requires knowing the current valuation of those properties, not the LTV for the top-level operating company.
I'm relatively new to investing, please excuse my ignorance. I'm guessing canetoad and 0715 are referring to bank covenants , I found this definition:
"Bank Covenants
Bank covenants, as described in bank credit agreements, may often be even more limiting than bond covenants. In many cases, a bank may require a debtor to maintain leverage ratios such as debt/equity, debt/EBITDA, or debt/EBIT under a certain threshold. These types of covenants are called maintenance covenants.
In case a covenant is breached, the bank will probably block further credit to the debtor involved and will require the covenant to be cured, generally under the threat of triggering a default.
Consequences of a Breach of Covenant
The breach of a covenant can trigger a technical default. However, the specific consequences of a breach of covenant should be analyzed on a case-by-case basis and depend on whether the creditor decides to waive the violations.
The consequences of a breach of covenant generally include:
A penalty or fee charged to the debtor by the creditor;
An increase in the interest rate of the bond or loan;
An increase in the collateral;
Termination of the debt agreement; and
Waiving the violation without important consequences." here: corporatefinanceinstitute.com.
There's two things that spring to mind. Firstly, the consequences are scaled and clearly open to negotiation, not quite the guaranteed Armageddon suggested. Secondly, there doesn't appear to be a standard level of LTV for a covenant breach. I would guess that this information is confidential between the bank and a the loanee, please could both of you let me know where you got your specific covenant breach information from.
If Steve Inglis doesn't sell properties within the next couple of months the covenants will be breached. They have only sold 3.5% of the assets in the whole year. They need to wake up and smell the coffee. The whole thing has 10 months left.
Valuation down by 11%
Rental down by 6% - £4 Million
Rent Collection down by 1.5%
Occupancy down by 3.4%
LTV up by 6% heading to breaches within months
Nothing positive about the update and all other REITS are reporting similar for offices, no turnaround in sight yet.
More of the usual from Inglis.Selective info.What about gross debt figures and cash available ( disclosed in 3Q report).? Occupancy down to 80%.Tenants down .They know what the NAV per share is.But chose not to tell us,rather let us try and calculate it.No mention of WAULT,so it must be declining.They have been talking about the bond refi for months.Are they deferring to wait for Interest rates to come down? Quite a tightrope.Bet ARA are very frustrated.
It looks to me as though they must be exceedingly close to violating the Santander covenant, while the RBS loan could also be an issue within 6m given the rate of NAV decline.
Regarding the bond, that doesn't worry me too much. I think they have some options there - maybe a £50m ZDP maturing in 3-4y paying 10% or so.
The bond itself still looks well-covered, but it looks to me like they'll have to be a further cut to the divi. Wild guess is a 25% divi cut given that the Santander loan is less than 20% of the secured debt. On the other hand, maybe they can reduce the LTV enough by selective property sales as they claim in the update. All hell will break loose if they breach the Scottish Widows covenant.